OPEC Has To Dump Its Oil Strategy Just As It Begins To Work

Desperate times call for desperate measures. And when things no longer work, you throw them out. OPEC may be just that desperate, and perhaps it is now willing to throw out its tried and trusted strategies of yesteryear when the oil industry was merrily rolling along.

With its member economies reeling from the lower-for-longer oil prices, OPEC has been publicly trying to get its members all on the same page on just how to lift crude prices, and even lobbying for support from non-OPEC producers to join the efforts to stabilize the oil markets. But with some OPEC members reluctant to participate, is the old OPEC go-to solution to have Saudi Arabia do all the cutting still on the table for consideration?

Just three weeks before the November 30 meeting, where members are expected to discuss the details of a production freeze or cut, OPEC published its 2016 World Oil Outlook in which it sees the total OPEC supply of crude oil and natural gas liquids at 40.6 million bpd in 2020.

This figure is projected to account for 41 percent of global liquids supplies, compared to the 37 percent market share for 2020 that OPEC had expected in its 2014 World Oil Outlook, according to figures crunched by Bloomberg. Last year, OPEC’s share of the world liquids supplies was 40 percent, higher than the 38-percent projection from 2014.

Back in 2014, OPEC, at the likely behest of its de facto leader Saudi Arabia, embarked on the mission to raise its market share, adopting a pump-at-will policy to that end. So far, that strategy’s most evident result has been the oil price crash stemming from the oil supply glut it helped to create.

Now it seems that—as far as vying for higher market share is concerned— the ‘no-limits’ pumping policy has finally worked.

So, Ali Al-Naimi, former long-standing Saudi oil minister and the architect of that strategy, is seeing his efforts to preserve and raise market shares pay off. In a book Al-Naimi is launching this month, he stands by his policy.

But Al-Naimi’s successor, Khalid al-Falih, who rose to power in May of this year, has been working on a different strategy for Saudi Arabia and OPEC, after seeing how the ‘no-limits’ production backfired spectacularly on OPEC economies, including Saudi Arabia’s, while U.S. shale proved to be more resilient in the lower price environment than initially thought.

Oil prices crashing from US$100 a barrel in 2014 to below US$30 in February of this year, and now around US$45, drained the budgets of oil-dependent economies, caused governments to slash costs and costly projects, raised budget deficits, reduced government spending and consumers’ purchasing powers, and slowed down economic growth.

Nigeria and Venezuela are also seeing their highly oil-dependent economies battered by the low oil prices, additionally aggravated by the Niger Delta militant violence, and the agenda of Socialist President Nicolas Maduro to seize all powers on his road to dictatorship, respectively.

So, OPEC’s market-share-seizure strategy came at a cost, and what a cost it has been. According to Bloomberg calculations based on OPEC data, the cartel’s crude oil sales would be worth around US$365 billion less in 2020 with the lower oil prices.

The low oil revenue is the other side of the market-share coin. This time around, it seems that the Saudis—and their new oilman—may be willing to manipulate production to prop up prices and save OPEC economies from even further slowdown.

Last week, Al-Naimi shed some light on the November 2014 talks about OPEC possibly cutting production. The former Saudi oil minister had then asked each OPEC oil minister individually if they would cut production.

“All the answers were no. The expectation was: ‘Traditionally you—Saudi Arabia—cut.’ [I said] we won’t do that anymore, that’s it,” Al-Naimi said last week in London, as quoted by the Wall Street Journal.

Traditions are not what they used to be, and the Saudis may be unwilling to cut if others do not follow suit. The Saudis are reluctant to back down on this issue because a unilateral cut (impossible as it seems) could undermine their position of leading the cartel, and give a free pass to Iran to reach its desired pre-sanctions market share, and the Saudis won’t have it.

The cartel, however, has seen in less than two months bitter infighting over which data to use to set limits; who would, should or could be exempt from cuts; and the background has always been who is most or least desperate to have oil prices higher.

Still, even if OPEC were to somehow cut a deal on output cuts, most analysts and industry officials believe that OPEC alone would do little to lift oil prices. So will non-OPEC Russia or other non-cartel producers carry the torch and do more than just vaguely ‘commit’ to joining efforts to stabilize the market?

If so, would a possible deal even hold, given OPEC’s poor track record of sticking to pledges? And finally, would an OPEC agreement even matter given that president-elect Donald Trump has promised an energy program to make U.S. fossil fuels great again?